CORPORATION Case Digest Prepared by: Manalo, Micah

34 – Govt of the Philippine Islands v El Hogar Filipino

TOPIC: Formation and Organization of Corporations

Court First Division

Citation GR No. 26649
Date July 13, 1927
Petitioners The Government of the Philippine Islands
Respondent El Hogar Filipino
Ponente Street, J.
Case Summary
El Hogar Filipino is the first corporation organized in the Philippine Islands under the Corporation Law. A quo
warranto proceeding was instituted by the Government of the Philippine Islands on the relation of the Attorney-
General against the building and loan association known as El Hogar Filipino, for the purpose of depriving it of its
corporate franchise. The Government alleges 17 causes of action, but none was held to cause the dissolution of the
corporation.
Background about El Hogar:
● El Hogar Filipino is the first corporation organized in the Philippine Islands under the Corporation law, enacted in
1906, and the association has been favored with extraordinary success.
● The articles of incorporation bear the date of December 28, 1910, at which time capital stock in the association had
been subscribed to the amount of P150,000, of which the sum of P10,620 had been paid in. Under the law as it then
stood, the capital of the association was not permitted to exceed P3,000,000, but by Act No. 2092, passed December
23, 1911, the statute was so amended as to permit the capitalization of building and loan associations to the amount
of ten millions. Soon thereafter the association took advantage of this enactment by amending its articles so as to
provide that the capital should be in an amount not exceeding the then lawful limit.
● From the time of its first organization the number of shareholders has constantly increased, with the result that on
December 31, 1925, the association had 5,826 shareholders holding 125,750 shares, with a total paid-up value of
P8,703,602.25. During the period of its existence prior to the date last above-mentioned the association paid to
withdrawing stockholders the amount of P7,618,257.72; and in the same period it distributed in the form of dividends
among its stockholders the sum of P7,621,565.81.
● A quo warranto proceeding was instituted by the Government of the Philippine Islands on the relation of the Attorney-
General against the building and loan association known as El Hogar Filipino, for the purpose of depriving it of its
corporate franchise, excluding it from all corporate rights and privileges, and effecting a final dissolution of said
corporation.
● The Government alleges 17 causes of action. This digest will cover only those that assail certain provisions of the
by-laws.
ISSUE – HELD – RATIO:

COA # 4 HELD
W/N the existence of an invalid bylaw is a misdemeanor No.
• It appears that among the by-laws of the association there is an article (No. 10) which reads as follows:
"The board of directors of the association, by the vote of an absolute majority of its members, is empowered to
cancel shares and to return to the owner thereof the balance resulting from the liquidation thereof whenever, by
reason of their conduct, or for any other motive, the continuation as members of the owners of such shares is
not desirable."
• This by-law is of course a patent nullity, since it is in direct conflict with the latter part of section 187 of the
Corporation Law, which expressly declares that the board of directors shall not have the power to force the
surrender and withdrawal of unmatured stock except in case of liquidation of the corporation or of forfeiture of
the stock for delinquency.
• It is agreed that this provision of the by-laws has never been enforced, and in fact no attempt has ever been
made by the board of directors to make use of the power therein conferred. In November, 1923, the Acting
Insular Treasurer addressed a letter to El Hogar Filipino, calling attention to article 10 of its by-laws and
expressing the view that said article was invalid. It was therefore suggested that the article in question should
be eliminated from the by-laws.
• At the next meeting of the board of directors the matter was called to their attention and it was resolved to
recommend to the shareholders that in their next annual meeting the article in question be abrogated.
• It appears, however, that no annual meeting of the shareholders called since that date has been attended by a
sufficient number of shareholders to constitute a quorum, with the result that the provision referred to has not
been eliminated from the by-laws, and it still stands among the bylaws of the association, notwithstanding its
patent conflict with the law.
• This provision was however never been enforced. The obnoxious bylaw, as it stands, is a mere nullity, and
could not be enforced even if the directors were to attempt to do so. There is no provision of law making it a
misdemeanor to incorporate an invalid provision in the by-laws of a corporation.

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CORPORATION Case Digest Prepared by: Manalo, Micah
34 – Govt of the Philippine Islands v El Hogar Filipino
TOPIC: Formation and Organization of Corporations
COA # 5 HELD
W/N Directors may fill vacancies in the directorate by choosing among Yes
stockholders
• In section 31 of the Corporation Law it is declared that, "at all elections of directors there must be present, either
in person or by representative authorized to act by written proxy, the owners of the majority of the subscribed
capital stock entitled to vote, . . .." Conformably with this requirement it is declared in article 61 of the by-laws
of El Hogar Filipino that, "the attendance in person or by proxy of shareholders owning one-half plus one of the
shareholders shall be necessary to constitute a quorum for the election of directors.
• As the corporation grew, it became difficult to reach a quorum despite efforts such as letter of notification to
each shareholder in addition to publication of notices in the newspaper.
• Owing to the failure of a quorum at most of the general meetings since the respondent has been in existence,
it has been the practice of the directors to fill vacancies in the directorate by choosing suitable persons from
among the stockholders. This finds basis in article 71 of their by-laws whereby the directors shall elect from the
among the shareholders members to fill the vacancies that may occur in the board of directors until the election
at the general meeting.
• Because of this, it appears that several of the individuals constituting the original directorate and persons chosen
to supply vacancies therein belong to prominent Filipino families, and that they are more or less related to each
other by blood or marriage. In addition to this it appears that it has been the policy of the directorate to keep
thereon some member or another of a single prominent American law firm in the City.
• Thus, it is charged that the board of directors of the respondent has become a permanent and self-perpetuating
body composed of wealthy men instead of wage earners and persons of moderate means.
• No fault can be imputed to the corporation on account of the failure of the shareholders to attend the annual
meetings; and their non-attendance at such meetings is doubtless to be interpreted in part as expressing their
satisfaction at the way in which things have been conducted.
• Upon failure of a quorum at any annual meeting the directorate naturally holds over and continues to function
until another directorate is chosen and qualified. Unless the law or the charter of a corporation expressly
provides that an office shall become vacant at the expiration of the term of office for which the officer was
elected, the general rule is to allow the officer to hold over until his successor is duly qualified. Mere failure of a
corporation to elect officers does not terminate the terms of existing officers nor dissolve the corporation. This
is based on Article 66 of their by-laws which declares that directors shall hold office "for the term of one year or
until their successors shall have been elected and taken possession of their offices."
• It results that the practice of the directorate of filling vacancies by the action of the directors themselves is valid.
Nor can any exception be taken to the personality of the individuals chosen by the directors to fill vacancies in
the body. Certainly it is no fair criticism to say that they have chosen competent businessmen of financial
responsibility instead of electing poor persons to so responsible a position. The possession of means does not
disqualify a man for filling positions of responsibility in corporate affairs.

COA # 6 HELD
W/N the payment of the compensation to the directors is excessive No
• Under section 92 of the by-laws of El Hogar Filipino 5 per centum of the net profit shown by the annual balance
sheet is distributed to the directors in proportion to their attendance at meetings of the board. As a result of this
practice, and the liberal measure of compensation adopted, the attendance of the membership at the board
meetings has been extraordinarily good.
• It is insisted in the brief for the Attorney-General that the payment of the compensation indicated is excessive
and prejudicial to the interests of the shareholders at large as they should be serving without pay or receiving
nominal pay or a fixed salary.
• The Corporation Law does not undertake to prescribe the rate of compensation for the directors of corporations.
The power to fixed the compensation they shall receive, if any, is left to the corporation, to be determined in its
by-laws (Act No. 1459, sec. 21). Pursuant to this authority the compensation for the directors of El Hogar Filipino
has been fixed in section 92 of its by-laws, as already stated.
• The justice and propriety of this provision was a proper matter for the shareholders when the by-laws were
framed; and the circumstance that, with the growth of the corporation, the amount paid as compensation to the
directors has increased beyond what would probably be necessary to secure adequate service from them is a
matter that cannot be corrected in this action; nor can it properly be made a basis for depriving the respondent
of its franchise, or even for enjoining it from compliance with the provisions of its own by-laws.
• If a mistake has been made, or the rule adopted in the by-laws has been found to work harmful results, the
remedy is in the hands of the stockholders who have power at any lawful meeting to change the rule.

COA # 8 HELD
W/N Art. 70 and 76 of the by-laws are invalid No.

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CORPORATION Case Digest Prepared by: Manalo, Micah
34 – Govt of the Philippine Islands v El Hogar Filipino
TOPIC: Formation and Organization of Corporations
• Article 70 of the by-laws in effect requires that persons elected to the board of directors must be holders of
shares of the paid up value of P5,000, which shall be held as security for their action; but it is added that said
security may be put up in the behalf of any director by some other holder of shares in the amount stated. Article
76 of the by-laws declares that the directors waive their right as shareholders to receive loans from the
association.
• It is asserted, under the eight cause of action, that article 70 is objectionable in that, under the requirement for
security, a poor member, or wage-earner, cannot serve as director, irrespective of other qualifications, and that
as a matter of fact only men of means actually sit on the board. Article 76 is criticized on the ground that the
provision requiring directors to renounce their right to loans unreasonably limits their rights and privileges as
members.
• Section 21 of the Corporation Law expressly gives the power to the corporation to provide in its by-laws for the
qualifications of directors; and the requirement of security from them for the proper discharge of the duties of
their office, in manner prescribed in article 70, is highly prudent and in conformity with good practice. Article 76,
prohibiting directors from making loans to themselves, is of course designed to prevent the possibility of the
looting of the corporation by unscrupulous directors.

RULING:
In conclusion, the respondent is enjoined in the future from administering real property not owned by itself, except as
may be permitted to it by contract when a borrowing shareholder defaults in his obligation. In all other respects the
complaint is dismissed, without costs. So ordered.

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